Borrowing Within a SMSF: An Overview

June 12, 2024 June 24th, 2024
Borrowing within an SMSF

One of the most common questions our financial planner, Greg Thornton, receives from clients is about borrowing within a Self-Managed Super Fund (SMSF). It’s a complex area, but when set up correctly, it can be a beneficial way to acquire an asset that might otherwise be out of reach. In this post, we will explore the circumstances under which an SMSF can borrow money and introduce the concept of Limited Recourse Borrowing Arrangements (LRBAs).

Circumstances for SMSF Borrowing

Legislation tightly controls the circumstances under which a SMSF can borrow money. These include:

  • Borrowing for Beneficiary Payments: A SMSF can borrow to pay a beneficiary if required by law or the governing rules. This borrowing must be for less than 90 days and less than 10% of the fund’s assets.
  • Superannuation Surcharge Payments: Similar to beneficiary payments, borrowing for surcharge payments must be short-term (less than 90 days) and limited to 10% of the fund’s assets.
  • Settling Securities/Investment Transactions: If, at the time of the investment decision, borrowing is likely not needed, the SMSF can borrow to settle transactions. This borrowing must be for less than seven days and 10% of the fund’s assets.
  • Limited Recourse Borrowing Arrangements (LRBAs): This is the most common scenario for SMSF borrowing and will be the focus of the rest of this article.


What is an LRBA (Limited Recourse Borrowing Arrangement)?


An LRBA is a special loan structure designed for SMSFs. It involves establishing a holding trust where the trustee, the custodian, legally holds the asset on behalf of the SMSF trustee. The key feature of an LRBA is that the borrowing must be on a limited recourse basis for acquiring an asset held in trust until the borrowing is repaid.


Practical Implications of LRBAs


In practical terms, the lender’s rights are limited to the asset held by the bare trust. If the SMSF defaults on the loan, the lender can only seize and sell the asset in the trust, not any other SMSF assets. This limited recourse nature protects the different assets within the SMSF.


Are you considering borrowing within your SMSF? Contact Greg today to schedule a consultation and learn how we can help you navigate this complex process to maximise your investment potential.


Source: Go-To Guide, Limited Recourse Borrowing Arrangement, SMSF Association Technical Team, July 2022


MBC Wealth is an authorised representative of Count Financial Limited ABN 19 001 974 625 holder of Australian financial services licence number 227232 (“Count”). Count is owned by Count Limited ABN 111 26 990 832 of GPO Box 1453, Sydney NSW 2001. Count Limited is listed on the Australian Stock Exchange. 
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